This document provides an introduction to basic financial management concepts for small businesses. It covers setting up a chart of accounts to categorize transactions, using common financial reports like income statements and balance sheets to understand business performance, and practicing common financial tasks like recording sales, expenses, and payments. The goal is to help small business owners get started with basic financial record keeping and reporting.

1. A Simple Start to Managing Your Business Finances A Guide to the Essentials QB_05/2005_01

2. Introduction to Financial Management Why Accounts are Important Using Reports Managing Essential Tasks: Practice Session Tips and Resources Appendix: Additional Concepts & Terms Financial Management Essentials

3. 1. What is Financial Management? Process of: Running your business Recording money coming in and out Using reports to : Understand how your business is doing Make decisions

4. Six Ways Financial Management Helps Your Business Succeed 4. Compliance. Report your company’s incomes, expenses, and payroll accurately to the IRS. 5. Insight and Decision Making . Make informed decisions – and price your product or service for profitability – with financial reports 6. Funding. To be considered for a loan or investment, you’ll need complete financial statements. 1. Cash Flow. Track the money going in and out of your business. 2. Manage Customers and Sales. Know and understand your customers through consolidated records. 3. Production. Obtain goods and services. Apply for and establish credit with your vendors. YOUR BUSINESS

5. Information is Power What do you want to know about your business ? How much money am I bringing in? How much am I spending? Is my business making any money? What’s the value of what my business owns? How much does my business owe to others? What is my business worth? Sales Expenses Sales – Expenses Assets Liabilities Equity

6. 2. Financial Accounts Why They Matter to Your Business Accurate record keeping lets you understand and use all your information Money in from payments received Data on customers and vendors Record of your bank accounts Money out for checks written, refunds and other expenses

7. Cash Flow: Money In and Money Out YOUR BUSINESS Money In Money Out CUSTOMERS Sales Services / Products Out VENDORS Expenses Services / Products In

8. Major Account Types Assets Current (cash, inventory, accounts receivable, etc.) Fixed (property, vehicles, machinery, etc.) Liabilities Current (within one year) Long Term Equity Contributed capital: owner’s investment Retained earnings (profits) Assets = Liabilities + Equity Everything your business possesses Everything your business has borrowed Everything your business owns

9. Categorize Your Transactions With a Chart of Accounts Chart of Accounts Master account lists – a chart of accounts – are used to sort your transactions into categories Each account category contains sub-accounts

10. Chart of Accounts: Your Master List of Accounts and Sub-Accounts NAME TYPE NAME TYPE INCOME ASSET Sales Income Checking Bank Other income Other income Accounts Receivable Accounts Receivable EXPENSE Undeposited funds Other Current Asset Advertising Expense Equipment Asset Car and Truck Expenses Expense LIABILITY Contract labor / payroll Expense Loans Liability Cost of goods sold Expense Sales Tax Payable Other Current Liability Entertainment / meals Expense EQUITY Office expenses Expense Contributed Capital Equity Repairs and maintenance Expense (Owner’s invested funds) Supplies Expense Retained Earnings Equity Taxes and licenses Expense (Business’ profits) Utilities Expense Other expenses Other expenses

11. Accounts: What We’ve Learned Consolidate your record keeping Use a standard set of accounts or categories to “file away” transactions—there is a common language Keep it simple: Significant accounts only Use Industry Specific Accounts Master account lists – a chart of accounts – are readily available for most types of business. Choose one specific to your industry, and make minor changes if needed.

12. 3. Reports Understanding Your Business and Decision-Making Use reports as a planning tool Gain insight into your sales Income statement (P&L) shows your profitability Balance sheet shows assets, liabilities and equity Regularly monitor your profitability – and your cash flow Reports help you understand how your business is doing

13. Make the Most of Your Reports What do you want to know about your sales ? What is selling? Who is buying? Who owes me money? Gain insight into the health of your business with reports: Sales by item Sales by customer Unpaid invoices by customer

14. Income Statement Summarizes the revenue and expenses of a company over a period of time Also called a Profit & Loss or P&L

15. Balance Sheet Shows the assets, liabilities, and equity at a given moment in time Assets = Liabilities + Equity Equity also referred to as Owners Equity or Retained Equity.

16. 4. Manage Essential Tasks Practice Session: Mark’s Atomic Graphic Designs Money in Record a sale Invoice a customer Receive a payment Make a deposit Money Out E. Write a check / record an expense F. Use a credit card / record an expense Remember, the better you understand your cash flow situation, the better you’ll be prepared to make the right business decisions.

17. A. Record a Sale Practice Session – Money In Money In: Record a Sale Customer buys business cards. Pays on spot with cash. You issue sales receipt. 1

18. A. Record a Sale Practice Session – Money In Track Your Business Issue sales receipt Record: 1. Customer 2. Item 3. Quantity 4. Payment type 5. Date 1 2 3 4 5

19. A. Record a Sale Practice Session – Money In See Where Your Business Stands Profit & Loss 6. Sales increase by $200.00 Balance Sheet 7. Assets increase by $215.50 8. Liabilities (sales tax payable) increase by $15.50 9. Equity increases by $200.00 6 7 8 9

20. B. Invoice a Customer Practice Session – Money In Money In: Invoice Customer Customer buys graphic design services. You complete the design. You invoice customer. 1

21. B. Invoice a Customer Practice Session – Money In Track Your Business Create invoice Record: 1. Customer 2. Service 3. Quantity/hours 4. Payment terms 5. Date 1 2 3 4 5

22. B. Invoice a Customer Practice Session – Money In See Where Your Business Stands Profit & Loss 7. Sales increase by $90. Balance Sheet 8. Accounts receivable increase by $90. 9. Equity increases by $90 7 8 9

23. C. Receive a Payment Practice Session – Money In Money In: Receive Payment Customer pays by check for business card design services invoice. Record receipt of payment. 1

24. C. Receive a Payment Practice Session – Money In Track Your Business Receive payment Record: 1. Customer 2. Payment type 3. Enter amount 1 2 3

25. C. Receive a Payment Practice Session – Money In See Where Your Business Stands Profit & Loss 4. Unchanged. Balance Sheet 5. Accounts receivable decrease by $90. 6. Undeposited funds increase by $90. 7. Equity unchanged. 4 5 6 Undeposited funds appear in “Other Current Assets” 7

26. D. Make a Deposit Practice Session – Money In Money In: Make a Deposit Go to bank to deposit check for design services and cash for business cards. Make deposit. 1

27. D. Make a Deposit Practice Session – Money In Track Your Business Make deposit Select: 1. Cash and Check 2. All funds to deposit 1 2

28. D. Make a Deposit Practice Session – Money In See Where Your Business Stands Profit & Loss 3. Unchanged. Balance Sheet 4. Checking / Savings increases. 5. Other current assets decrease. 6. Equity unchanged. 3 5 4 Undeposited funds appear in “Other Current Assets” 6

29. E. Write a Check / Record an Expense Practice Session – Money Out Money Out: Write a Check Pay your telephone bill by check. Write check / record expense. 1

30. Track Your Business E. Write a Check / Record an Expense Practice Session – Money Out Write check Select: 1. Payee 2. Amount 3. Transaction type (Expense – “Utilities”) 1 3 2

31. E. Write a Check / Record an Expense Practice Session – Money Out See Where Your Business Stands Profit & Loss 4. Expense (Utilities) increases by $45. Balance Sheet 5. Checking / Savings decreases by $45. 6. Equity decreases by $45 4 5 6

32. F. Use Credit Card / Record an Expense Practice Session – Money Out Money Out: Use a Credit Card Buy office supplies with credit card. Use credit card / record expense. 1

33. Track Your Business F. Use Credit Card / Record an Expense Practice Session – Money Out Update credit card register Select: 1. Payee 2. Transaction type (Expense -- Supplies) 3. Amount 1 3 2

34. F. Use Credit Card / Record an Expense Practice Session – Money Out See Where Your Business Stands Profit & Loss 4. Expense (Supplies) increases by $95. Balance Sheet 5. Credit cards increases by $95. 6. Equity decreases by $95. 4 5 6

35. 6. Tips and Advice Getting Started Helpful Resources Online Resources Congratulations!

36. Getting Started Build your toolkit Consider software packages such as QuickBooks Simple Start (Trial Edition is available) Structure your accounts Start with a minimum # of accounts and add as needed Establish an accounting routine – and stick to it Reconcile accounts monthly Update financial statements quarterly Establish Good Accounting Habits Record transactions regularly Accuracy and consistency are essential Fix mistakes as they happen Manage and reconcile bank account regularly

37. Helpful Resources Advance Your Knowledge Professional Help Accountants Look for knowledge of your industry QuickBooks ProAdvisors Expert set-up can save you time Free 1-hour consultation Small Business Development Center (SBDC) counselors Training Tools Take classes (either online or at local colleges) QuickBooks Learning Solutions (look under “Training” at www.QuickBooks.com) Expert help can make the process of setting-up and maintaining your books much easier. Be sure to look for a professional with knowledge of your industry – and of course, don’t be afraid to ask for references.

38. Online Resources Small Business Development Centers www.sba.gov/sbdc/ sbdcnear.html Internal Revenue Service www.irs.gov/businesses/small/ U.S. Chamber of Commerce www.uschamber.com QuickBooks Financial Software www.quickbooks.com Find a Certified QuickBooks ProAdvisor www.usequickbooks.com/locateadvisor)

39. Congratulations! You now know: Why financial management is critical to effectively run a business How to set-up and manage your accounts The usefulness of financial reports Time to put your knowledge to work! Good luck!

40. Appendix: Additional Terms and Concepts A Simple Start to Managing Your Business Finances

41. Business types Cash or accrual Debits and credits Journal Ledger Financial Management Terms and Concepts

42. Determine Your Business Type Sole Proprietorship One owner Partnership or Limited Liability Corporation Two or more owners S Corporation Small business with one or more shareholders C Corporation Large business with one or more shareholders Non-profit Organization There are more than 23.7 million small businesses in the United States. 572,900 new firms are founded each year. Source: SBA, Office of Advocacy. Based on 2003 data.

43. Choosing an Accounting Type Cash or Accrual? A. Cash accounting The practice of recording sales and expenses only when cash is actually received or paid out B. Accrual accounting The practice of reporting income when earned and expenses when incurred Businesses with inventory (e.g. retailers) must use this method Most businesses opt for accrual method of accounting At any given time, gives a more realistic picture of the health of the business Choose whichever accounting method works best for you – the important thing is to be consistent once you’ve selected an accounting type

44. Debits and Credits Double Entry Accounting Accountants use “debits and credits” to describe how transactions are recorded in the general ledger Each transaction increases one account and decreases another System balances itself You don’t need to be too concerned with the mechanics of double entry accounting, debits and credits, as software programs handle automatically. But as a business owner, you might run into these terms.

45. Mark’s Atomic Graphic Design: Journal Journal entries capture all cash in and all cash out activity.

46. Mark’s Atomic Graphic Design: General Ledger General ledger (GL) shows all activity by account type.

47. Intuit would like to thank the following advisors for their help developing this presentation: Peter Pappas, Regional Director, Connecticut Small Business Development Center, Groton, CT Neal Nelson, Counselor, Maricopa Community College Small Business Development Center, Phoenix, AZ Charles Eason, Director, Solano College Small Business Development Center, Fairfield, CA Acknowledgements Do you have feedback, success stories or suggestions for improving this course? Email us at sbdcsupport@intuit.com.